Border Carbon Adjustments
Adele C. Morris, Ph.D.
Fellow
Policy Director, Climate and Energy Economics Project
The Brookings Institution
September 5, 2012
1
What are the problems?
• Deleterious cross-border effects
»
Emissions shifts that reduce environmental effectiveness and/or
raise costs
»
Production shifts that reduce welfare of actors
• Want to incentivize non-actors to participate
»
Counteract incentive to free ride that may increase with size of
action or actors
2
Empirical Questions
• How big are the problems?
»
What are the channels of leakage and what is their relative size?
»
How big is the loss of welfare in abating countries?
»
How big is the efficiency loss?
»
How big is the incentive to not participate?
»
What do the answers depend on (e.g. stringency of coalition policy, size
and composition of coalition, timing)?
• What can actors actually do about it?
»
Empirical results for various policy prescriptions: costs, benefits, and
distributional effects.
• What are the answers for the US in particular?
»
Revenue/spending implications?
3
Empirical Questions: Emissions
• Emissions increases in non-coalition countries
–
elasticities of substitution and relative policy stringency
• Emissions increases from fall in traded fuel prices
–
–
–
–
Climate policy in both coalition and non-coalition countries (fixed C
price vs. fixed domestic emissions goal vs. fixed collective goal)
Size and composition of coalition
Cartel behavior
Fuel substitutions and effect of policy on fuel use and trade
• Emissions changes (+ or -) from general equilibrium effects
–
–
Exposure of non-coalition economies to coalition economies
Size and composition of coalition plus policy stringency
4
BCA targets
part of this
• Emissions increases in non-coalition countries
–
elasticities of substitution and relative policy stringency
• Emissions increases from fall in traded fuel prices
–
–
–
–
Climate policy in both coalition and non-coalition countries (fixed C
price vs. fixed domestic emissions goal vs. fixed collective goal)
Size and composition of coalition
Cartel behavior
Fuel substitutions and effect of policy on fuel use and trade
• Emissions changes (+ or -) from general equilibrium effects
–
–
Exposure of non-coalition economies to coalition economies
Size and composition of coalition plus policy stringency
5
Current US Policy Debate
• Cap and trade is dead.
• Policy default is Clean Air Act plus ancillary subsidies, standards,
and other dogs and cats
• Main alternative: Carbon tax in fiscal reform package
• Essentially no concern expressed about welfare outside US
• Some concern about emissions leakage, but probably unwilling
to compensate at US expense
• Averse to transfers of all kinds, e.g. from offsets
»
Offsets become tax expenditures
• Political significance of trade outpaces empirical significance
6
US Carbon Tax Policy Questions
• What are US options for cross-border
issues?
» Do nothing
» BCA, OBR, exemptions
» Tax swaps that improve competitiveness
» Targeted distributional programs
• How could our policies be used against
us?
7
US Policy Questions
• How should we design a BCA?
»
Continuous variable across countries, sectors, firms, products?
»
Phase out or transition to some other measure? Contingencies?
»
How do we determine the magnitude?
»
Administrative questions
• How do we determine the magnitude of a BCA?
»
What determines whether BCA > 0?
»
How do we determine comparable action?
»
If emissions leakage is the issue, what about command and control
countries? Existing energy taxes?
»
What about varying effective carbon price across economies?
• How could our policies be used against us?
8
Effects of carbon tax on firms and welfare
• Firms aren’t people; shareholders and
workers are.
• Carbon tax and tax reforms will affect
different firms differently
» How energy intensive?
» Abatement costs?
» Ability to pass along costs?
» Existing effective marginal corporate tax rate?
• What matters is net effect of all tax and
spending reforms
• Could favorable corporate income tax reform
help energy-intensive trade exposed
industries?
9
• Declines in consumption depend on long run general equilibrium
»
Lower wages, fewer jobs in EITEs – but labor markets adjust
»
What if dollar strengthens?
• Decline in shareholder value
»
How much loss will accrue to US holders of US assets?
• How to partition welfare loss across carbon-based competition
and other forces?
»
Long run trends (e.g. driven by exogenous changes in input prices)
»
Energy intensive industries shrink independent of trade exposure
»
Larger coalition reduces competitiveness problem; also reduces overall demand for
energy intensive goods
• Carbon tax is regressive.
• US has a welfare issue independent of EITE. Need something like
trade adjustment assistance?
10
Recent evidence from Brookings on Employment Part 1:
“Pricing Carbon in the US: A Model-Based Analysis of a
Power-Sector-Only Approach”
Warwick McKibbin, Adele Morris, and Pete Wilcoxen
•
Modeled policy similar to Bingaman 2010 proposal for power sector and
compared to analogous economy-wide measures
•
Used G-Cubed CGE Model
•
Linearly declining emissions targets for U.S. electricity generation
•
»
17 % below 2005 levels in 2020
»
42 % below 2005 levels in 2030
Calculate carbon tax
»
Revenues go lump sum to households
• Labor markets adjust
11
CO2 Tax Trajectory
Dollars per Metric Ton
10
20
30
40
50
46
25
23
13
0
rate of tax rate growth: 4%
2000
2010
Core
Electricity only
2020
Year
Same Price
Economy wide
2030
Same Emissions
2040
12
Effects on US employment
$23/ton
$13/ton
-1
Percent Change from Base
-.5
0
.5
are probably negative, but small and temporary.
2000
2010
Core
2020
Year
Same Price
2030
Same Emissions
2040
13
Recent evidence from Brookings on Employment Part 2:
The Potential Role of a Carbon Tax in U.S.
Fiscal Reform
Warwick McKibbin
Adele Morris
Peter Wilcoxen
Yiyong Cai
•
•
•
•
Brookings, Australian National University
Brookings
Brookings, Syracuse University
Australian CSIRO
Modeled carbon tax of $15/ton rising at 4% over inflation
Used G-Cubed CGE Model
Modeled different disposition of revenues
Tax swaps as border measures?
14
0
Dollars per Ton
20
40
60
80
Tax Rate on Carbon Dioxide
2010
2020
Base
S5_CT/LTR
2030
Year
S1_CT/LS
S6_CT/KTR
2040
2050
S2_CT/DR
15
.2
Changes in Employment
Percent Change
-.1
0
.1
Capital tax swap
-.2
Lump sum and other recycling
2010
2020
S1_CT/LS
S5_CT/LTR
2030
Year
2040
S2_CT/DR
S6_CT/KTR
2050
Before-Tax Profits Required to Pay $1 to Investors Across Sectors:
Industry-specific tax breaks incentivize investment in specific industries.
Slide source: The Hamilton Project, A Dozen Facts About Tax Reform, May 2012
17
Other Brookings results confirm
• The burden of the agreement is importantly
different than the effort required to meet
domestic targets.
18
Copenhagen Accord:
The top three countries by carbon price…
100
90
W. Europe
Japan
US
Figure 6: Price per Metric Ton of CO2
80
USA
$2006/ton CO2
70
Japan
Australia
60
W. Europe
50
ROECD
40
China
India
30
EEFSU
20
10
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Year
Source: W. McKibbin, A. Morris, and P. Wilcoxen, “Comparing Climate Commitments: A Model-Based Analysis of the
Copenhagen Accord,” Brookings Institution, 2010
19
…are not the top three by largest GDP losses.
% change in 2020 GDP relative to BAU
2
1
0
USA
Japan
-1
-2
-3
-4
-5
Australia
W. Europe
ROECD
China
India
EEFSU
OPEC
World
-6
-7
Australia, Rest of OECD (Canada), and OPEC
Source: W. McKibbin, A. Morris, and P. Wilcoxen, “Comparing Climate Commitments: A Model-Based Analysis of the
Copenhagen Accord,” Brookings Institution, 2010
20
Contact information
Adele Morris, Ph.D.
Fellow and Policy Director, Climate and Energy
Economics Project
The Brookings Institution
amorris@brookings.edu
(202) 797-4376